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Northwestern Memorial Hospital Faces a Brave New World

If you have read my earlier blogs, you know that I am writing a book about the organization of healthcare delivery. A recent story in the Chicago Tribune reminds me that I need to keep my nose to the grindstone. The article told of changes underway at Northwestern Memorial Hospital. In order to prepare for new payment models, the medical staff and hospital want to create something along the lines of an Accountable Care Organization. The ACO will accept an “all-in” fee for treatment of specific conditions. The ACO makes money if it can keep costs under the fee and receives bonuses if quality objectives are met. The ACO model, or versions of it, have floated around for some time, and prepayment is certainly not new. What is new is that payers will now prepay for all costs associated with episodes of care, as opposed to prepaying hospitals for inpatient stays, or prepaying primary care physicians for a year of primary care.

The ACO model tries to better align the payment modality with the “product” that patients would naturally purchase. This should, in theory, lead to a matching of incentives with production. Hospital prepayment leads to a shift to outpatient care. Primary care physician prepayment leads to too much hospital care. Episode of illness prepayment should eliminate these gaming incentives.

Northwestern Memorial and its medical staff still face a dilemma. Should they create a new third legal entity to accept the prepayment, or should the prepayment go directly to the hospital or medical foundation? More importantly, should the hospital and medical foundation become partners in the new venture, or, more radically, unite into a single entity without creating the new entity? Healthcare executives have not always approached this question in the most thoughtful manner, as this short film painfully shows. (Painfully funny if you approach it with the right mindset.)

Integration has many positive connotations, and executives who create new integrated organizations can usually keep their boards at bay. This may explain why so many executives are eager to integrate. But integration comes with numerous challenges. It will take an entire book to make this argument clear, but consider the following two questions. First, what happens when physicians switch from being entrepreneurs to being employees? Second, accepting all-in capitated payments turns the ACO into a de facto insurance company. Will the ACO have the capabilities to be an effective insurer? I hope that Northwestern Memorial does not face the future with its eyes wide shut. Many hospitals have fared quite poorly by jumping on the integration bandwagon without understanding the risks.

David Dranove is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University's Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including "The Economic Evolution of American Healthcare and Code Red". He has a Ph.D. in Economics from Stanford University.

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19 replies »

  1. I think the ACO model could be helped along if teaching hospitals were paid for their medical education function with tax dollars. I note that Switzerland covers a portion (don’t know what percentage) of hospital costs with general tax revenue. R&D should be covered mainly by NIH grants and philanthropy. For complex cases for which they have earned a center of excellence designation and other hospitals can’t handle, they should be paid appropriately and well. For all the routine care that most providers can handle competently, they should have to compete on price and quality with the community hospitals.

  2. As long as the c-suite folks and entourage continue to take down $ millions, they do not give a hoot about the patients or doctors. They will figure out away.
    The future is not in medical care as a physician, it is in hospital administration. Sit and meet with consultants at the country club or in a luxurious office suite far removed from the hospital, get home by 5p and screw the doctors by paying them some scraps from the ACO.

  3. I think the ACO model could be helped along if teaching hospitals were paid for their medical education function with tax dollars. I note that Switzerland covers a portion (don’t know what percentage) of hospital costs with general tax revenue. R&D should be covered mainly by NIH grants and philanthropy. For complex cases for which they have earned a center of excellence designation and other hospitals can’t handle, they should be paid appropriately and well. For all the routine care that most providers can handle competently, they should have to compete on price and quality with the community hospitals.
    It would also be helpful if quality and outcomes data were certified by some credible independent third party, as opposed to insurance companies, so both patients and referring doctors will have more confidence in it. After all that’s done, give us disclosure of actual insurer contract reimbursement rates and tiered in network insurance products.
    If that doesn’t work, we will probably wind up with something like Maryland’s all payer system for hospital services but that would likely require Medicare and, especially, Medicaid to pay significantly more than they do now so private insurers can pay less. It’s hard to see that happening in the current federal and state fiscal environment.

  4. Hospitals make money either by admitting people (and doing things to them) or scanning/operating on them in the ambulatory setting. Deputizing them to “save money” for the Medicare program is placing them in a conflict of interest position relative to their core business.
    While getting ready for ACO’s, hospitals are doing exactly what you’d expect them to do: a new wave of mergers with putative competitors, and buying up all the docs in town to control the physician market. Then, they’ll turn to the private insurers and Nate’s self-insured flock to pay the “integration” costs, so they end up subsidizing the 2% reduction in Medicare costs (best case) from ACO’s.
    Don’t hold your breath. The last time hospitals did this, they got killed, and set up a new wave of health cost inflation. . .

  5. tcoyote,
    this is a lot of if’s but there is a small chance this could turn into some good if things fall out just right and the politicians don’t rush in to screw it up again. Looked at objectivly HMOs accomplished their goal very well, the horror stories of ratioing while on rare occasion bad were way overblown and provided cover for politicians to undo what they created. A lot of the ratioing that was demonfied back then is now being considered as necessary.
    Short version of best case possibility
    ACOs integrate and cut the salaries of the superstar doctor, The 7 and 8 figure salaries disappear and the high 6 become the exception not the norm.
    Government ends Mergers and allows more competition in the hospital metro areas and breaks the sole community hospitals out of the conglomorates.
    After doctor salaries are fixed employers go after hospital billings and overhead by moving business to more efficient providers and not paying for excessive and unecessary care.
    Government gets out of the delivery of healthcare and privitizes it with strong safeguards but strong personal responsibility.
    Its long shot but there is a road there. Atfer sitting through 3 day PPACA conference I don’t see how we can reign in the hospitals without it first being repelled.

  6. “And those comparing the ACO to capitation and PHO’s need to do some more research on the payment models, quality and performance aspects, and the structural implications for the ACO.”
    twa exactly what do you suggest studying in regards to organizations that don’t exist except in theory?
    “oh so complicated and somebody will get screwed.”
    Are you really so naive to think that someone won’t get screwed? Have you not been reading the regs that have been issued and have you never worked with capitation and think this won’t be complicated?
    “the fundamental restructuring of the health system around patient quality and efficiency marks the end of self-serviing provider-oriented medicine.”
    Are you knowingly paraphrasing Ted Kennedy circa 1973 when he wrote and passed the HMO Act or is this the best case of Irony ever typed on THCB?

  7. This idea is not going to get it done. It is, as Bev aptly puts it, a conveyance of power to the hospital. The hospital’s main goal, sadly, is to protect its franchise, and that of the specialists who bring it most of its profits. How will the hospital demand sacrifice from the people making $700 k a year when it depends on them for its imaging and surgical revenues?
    Most teaching hospitals already shovel a pile of dollars over to their medical school (ave. subsidy around $90 million a year). Are they going to pull back some of the subsidy, to save money, or increase it, to make the faculty whole? Lottsa luck on either direction. If they opt to increase the subsidy, where’s the money going to come from (hint- from juicing the privately insured patients).
    This idea is brought to you by the same fuzzy thinkers that thought thirty years ago that “the” solution to our problem was the integrated prepaid group practice. We’d all be Kaiser, which has taken seventy years in a “free market” and has yet to reach 10 million subscribers. When you put docs on salary, they put their feet up and begin complaining about their working conditions, or they unionize to protect their franchises. Kaiser’s Permanente Medical Group is really a labor union, not a business.
    The ACO idea-virtual patients, virtual care systems, managed care without any downside risk- is as insubstantial a policy idea as I’ve seen in a very long time.
    It’s a classic “granfalloon”, in Kurt Vonnegut’s classic phrase. A huge diversion of energy from the really tough problems- reducing waste, reducing patient risk, improving responsiveness and honoring patients and their families.

  8. Barry, Bev, and twa–agree with most of your comments. ACOs provide a chance to recreate a system that has gone way off track. Hospitals will play much less of a role in this one, as beds will empty out and the buildings become white elephants in many respects. Physicians will need to lead in order for the public to have faith in the system. Most importantly, hospitals AND physicians need to find a way to fold in the financing mechanism (i.e. the insurance functions) into their ACOs without giving away the store to the traditional insurers. I have no faith in the Anthems of the world as “partners” in these ACO ventures. Non-profit hospitals and their docs should find or create non-profit insurance partners as well. There is no longer a need for the financing mechanism to suck up 15-20% of the premium dollar. The insurance function is a necessary one, but not at historical cost levels. This is a chance to end a system gone awry.

  9. While I think the ACO model offers the potential to organize and deliver healthcare more cost-effectively than under fee for service, hospitals will probably have to get better at estimating their costs before they can take on the associated financial risk. At a conference I attended several months ago, one industry executive commented that, in her opinion, hospitals did not yet have the infrastructure they will need to execute the ACO model effectively.
    At the same time, if we expect referring doctors to help steer patients toward the most cost-effective, high quality providers, they will need robust, user friendly tools to help them easily identify who those providers are. Patients, for their part, will need to be subject to a financial penalty in the form of a higher co-payment or coinsurance amount if they insist on going to the more expensive hospital or doctor even though the care quality is no better than what can be found elsewhere in the area. Providers and patients need to care about costs even when insurance is paying most of the bill. To make that happen, appropriate information and financial incentives need to be in place. As of now, they aren’t, at least for the most part.

  10. I agree with your second comment twa, you are so right about ‘usual path of resistance’. This is killing us.

  11. To be fair – I will add that left to hospital administrators the implementation is likely to be sub-optimal. Much of the language around ACOs is physician oriented. If physicians follow the usual path of resistance instead of leadership, than the outcome will be variable. If physicians step up and provide leadership – than I think it shows much promise.

  12. The comments and detractors from the ACO concept seem to think that everything is just hunky dory now and that this will be oh so complicated and somebody will get screwed. Well patients and puchasers are getting screwed everyday right now. And those comparing the ACO to capitation and PHO’s need to do some more research on the payment models, quality and performance aspects, and the structural implications for the ACO. Its flat lazy to just say its capitation all over again. I actually think that many of the detractors understand the concept all too well and realize that the fundamental restructuring of the health system around patient quality and efficiency marks the end of self-serviing provider-oriented medicine.

  13. I wonder how Northwestern will deal with the issue of equitably carving up the bundled payment among providers involved in a care episode who are not hospital employees.
    More importantly, hospitals and ACO’s with sufficient local or regional market power could, in theory, extract a reimbursement rate from insurers that could exceed what it would have been under fee for service. This is why there is a need for transparency of actual insurance contract reimbursement rates as well as performance on appropriate quality metrics so referring doctors can readily determine who the most cost-effective providers are in the market. At the same time, patients need to be exposed to higher co-insurance or co-payment amounts if they choose to go to a more expensive facility even if its care quality is no better than its competitors’. Hopefully, tiered in network insurance products will gain traction among employers.
    Finally, prospectively estimating costs and financial risk in order to arrive at an appropriate reimbursement rate for a particular type of care episode is no easy task. Will ACO’s be up to the job? We’ll see.

  14. It is too bad that the rush to jump on the bandwagon (like many other fads in health care) is leaving too little time to think this through. I have felt since day 1 that putting all the power in the hands of the hospital executives (e.g., converting the docs and everyone else involved to hospital employees)is a recipe for eventual failure. Power must be shared between the care providers and the administrative executives, or the foundation for inequality, resentment, poor care, and dysfunctionality is solidly laid.

  15. Well Northwestern Memorial Hospital being one of the many at risk as the plan unfolds with new complex, questionable methods. This circle of Mayhem is going to cause havoc smh.

  16. Has the State DOI given an opinion yet? Under most DOI interpertations the ACO is accepting risk for a premium and thus be required to hold an HMO or Insurance license. Which creates all sorts of other issues and scares most away from undertaking such task.
    On the other side though if I am going to pay DD’s ACO $200,000 for a transplant case I’m going to want to know they will be around for X years to see it through. Some sort of reserve and accountability will need to be there. What got more then one CA Hospital in trouble 15+ years ago was quick cash payments with long term obligations. I remember a couple that went into receivership.
    Are you seeing any difference between ACO 2010 and PHO/IHO 1995? Besides the name change I haven’t seen where anything is being done differently, hopefully we have all learned from the mistakes of the 90s but besides that we seemed destined to fail for the same reasons.
    “Will the ACO have the capabilities to be an effective insurer?”
    doutful but this is easy to solve, just hire TPAs like they did last time. This use to be big business for TPAs back then, something we are well positioned to do again.
    I have seen very little willingness for hospitals to take these steps

  17. This is going to become very complex, like a Rubric’s cube. Everyone is going to be searching for answers to questions not already asked. Our insurers and government seem to throw things at us and we have to hit it back. Where are the risks for them? I found a very interesting commentary at the Medinnovation blog authored by Richard Reece, MD. It is well worth the read. There are no experts you can depend upon…charting new ground.

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